Government report shows solid economic growth at end of 2013, brightens outlook for 2014

WASHINGTON – Consumers will spend more. Government will cut less. Businesses will invest more. And more companies will hire.

Add it all up, and you can see why expectations are rising that 2014 will be the best year for the U.S. economy since the recession ended 4 1/2 years ago. That’s why the Federal Reserve is pressing ahead with a plan to scale back its economic stimulus.

The optimists got a boost Thursday from a government report that showed consumers fueled solid economic growth in the final quarter of 2013. The report lifted hopes that the economy will be able to withstand turmoil in emerging economies, a pullback in the Fed’s stimulus and mounting risks to the U.S. stock market over the next 12 months.

Americans struggling with long-term unemployment and stagnant pay might not get relief anytime soon. And areas such as manufacturing, construction and home sales remain far from full health. Still, the outlook for the economy as a whole brightened after the government said growth reached a 3.2 per cent annual rate last quarter on the strength of the strongest consumer spending in three years.

“The economy showed real signs of momentum at the end of 2013,” said Diane Swonk, chief economist at Mesirow Financial. “We are better positioned for decent growth for 2014 than we were a year ago.”

Consumer spending surged in the October-December quarter at an annual rate of 3.3 per cent — the best pace since 2010 and a big jump from the 2 per cent growth rate of the previous quarter. Consumer spending is particularly important because it accounts for about 70 per cent of the economy.

For 2013 as a whole, the economy grew a tepid 1.9 per cent, weaker than the 2.8 per cent increase in 2012, the Commerce Department said Thursday. Growth was held back by higher taxes and federal spending cuts that kicked in early in 2013.

A budget deal Congress approved earlier this month halted tens of billions in additional spending cuts that were due to kick in this year. With that drag diminished, many economists think growth could top 3 per cent in 2014. That would be the best showing since the recession ended in mid-2009.

The strength in consumer spending last quarter was driven by purchases of both durable goods — products such as cars, computers and communications equipment — and nondurable goods like clothing. Spending on services also rose strongly.

In addition, businesses invested in more equipment. There was also strength from a shrinking trade deficit.

Spending on home construction declined, though. And government spending fell at a 4.9 per cent rate last quarter, led by a plunge in federal spending. That was a result, in part, of the government’s 16-day partial shutdown during October. The shutdown shrank fourth-quarter growth by about 0.3 percentage point, the government said.

Many global investors fear that the Fed’s pullback in its bond purchases will raise U.S. interest rates and cause investors to shift money out of emerging markets and into the United States for higher returns. Currency values in emerging economies have fallen over that concern.

In response, central banks in emerging economies, from India to Turkey to South Africa, have been acting to counter any damage from the Fed’s pullback and the prospect of higher U.S. rates. They’ve been raising their own rates, hoping to control inflation, lift their flagging currencies and keep investors from fleeing. In Argentina, consumer prices are soaring, the treasury is short on foreign currency, and the peso has suffered its sharpest slide in 12 years.

It’s possible the turmoil in those countries could spill into developed economies such as the United States’. Overseas demand for U.S. goods might suffer, for example. Investors might abandon stocks globally, including in American markets.

But most analysts think the improving U.S. economy will manage to withstand any damage that might spread from overseas.

“I don’t think the (U.S. economy) is terribly vulnerable, assuming it doesn’t rock financial markets in a deep way,” said Joshua Feinman, global chief economist with Deutsche Asset and Wealth Management. “What we’re seeing in places like Turkey, South Africa and Argentina I don’t think matters all that much in the U.S. … The U.S. does seem to be gaining strength of its own domestically. And Europe is at least stabilizing.”

The solid U.S. economic growth in the October-December quarter followed an even stronger 4.1 per cent annual growth rate in the July-September quarter. But that surge was due to a huge buildup in business stockpiles that slowed during the fourth quarter.

The 3.2 per cent estimated growth rate for the economy last quarter was the government’s first of three projections of gross domestic product for the October-December quarter. GDP measures the economy’s total output of goods and services.

This year, economists think the economy will get a lift from continued gains in hiring. Further steady job growth would give more households money to spend and help increase consumer spending.

In addition, U.S. manufacturers are expected to gain from rising global demand. And housing construction and auto sales are expected to strengthen further in 2014.

Many analysts think the Fed will keep paring its support at each of its meetings this year until it eliminates new bond purchases entirely in December. In making the announcement, the Fed cited an improving economy, including more strength in consumer and business spending.